Do you just nod when your tax preparer asks you if you sent out 1099s last year? Or do you send them and dread every second of it? Or maybe you are a pro and have it all ready to go.
What is a 1099-NEC?
What is a 1099-NEC? NEC stands for non-employee compensation. The 1099 series of forms provides the IRS an inside view of payments (i.e. taxable income) made to service providers, individuals, and businesses outside of payroll.
Prior to 2020, non-employment compensation was reported via form 1099-MISC. These payments are now reported on a 1099-NEC form.
As a taxpayer, not reporting 1099 income on your personal tax return is an automatic IRS red flag and something you want to avoid.
As a business owner, not issuing 1099-NECs can result in hefty fines and penalties.
This can be confusing, so we are here to break it down for you!
To simplify it, as if anything in the IRS is simple if your business makes "qualifying payments" in a tax year, your business is required to file and issue 1099-NECs.
Note these are only reporting requirements for businesses and do not apply to individuals paying others for services.
Who sends out 1099-NEC forms?
Businesses are required to send out 1099-NEC forms for "qualified payments" in a tax year. This reporting requirement applies to all businesses making payments, whether you are a corporation, partnership, limited liability company, or sole proprietorship.
Individuals are NOT subject to reporting requirements and do not have to issue 1099-NEC forms.
Who receives 1099-NEC forms?
We know we need to do it, so who gets one... what are the rules?
Businesses pay for products and services all the time, does everyone require a 1099-NEC form?
The short answer is no.
Only those that qualify as reportable payments require a 1099-NEC form.
Only payments to non-incorporated businesses (with the exception of attorneys) qualify as reportable. Thus, payments to S Corporations or C Corporations do not require 1099-NEC forms.
The following lists examples of "qualified payments" that trigger reporting requirements of a 1099-form:
- At least $600 in business rental income
- At least $600 in services performed by a person or business who is not an employee
- At least $600 in prizes, awards, or other income payments
- Royalty income of at least $10
- Business attorney fees of at least $600 or more - regardless of the attorney's incorporation status
- A minimum of $400 for independent contract work
- At least $5,000 of direct sales to a buyer for resale other than a permanent established retailer
When are 1099-NEC forms due?
1099-NEC forms are due by January 31st.
Failure to file penalties range from $50 to $280 per form in 2022, depending on how delinquent they are. There are maximum fines per year for small businesses.
This is a short window to get your 1099-NEC forms out. It is established as such so that individuals receive their 1099s in time to file their own tax returns.
What information is needed to prepare and send out 1099-NEC forms?
The 1099-NEC form requires you to enter the following information:
- Name of individual or company that you paid
- Address of individual or company
- Total amount paid in the tax year and the tax year it applies
- Any federal or state withholding amounts
- Tax Id (social security number or EIN for business)
- Your business name, address and Tax ID (social security number or EIN for business)
Note that when you file 1099-NEC form(s), you also file a form 1096 to the IRS, which simply summarizes all of the 1099 forms sent for your business.
Resources for sending out 1099-NEC forms
Printing these forms yourself on the triplicate-issued IRS paper forms is a thing of the past. Don't get me wrong, you can still find these forms at Staples, the post office, and even Costco.
However, various websites have simplified the filing process and will issue and file these forms for you (i.e. taxbandit.com, tax1099.com, 1099online.com).
If you don't want to administer the process of sending out your 1099s, your tax preparer or bookkeeper may offer this as a service for you, typically with a fee per form sent.
Time-saving tips for 1099-NEC reporting
Aside from having your bookkeeping up-to-date and knowing HOW MUCH you paid to all your vendors, there are a few time-saving tips that make this entire process easier for you.
Avoid putting yourself in a position of having to call all your vendors on January 30th to track down their tax information!
Also, note that filing a 1099-NEC with incorrect information can cause tax issues for you and your vendors. So getting this right is critical.
From large to small companies, this can all be streamlined easily by requiring a W-9 form from your vendors as part of your VENDOR SETUP PROCESS. This form collects all this information UP FRONT for you.
Simply, make it a rule that no payments can be made until a W-9 form is received.
Most bookkeeping software allows you to attach files to vendor profiles and "flag" them as 1099 vendors. From the W-9, you can see if the payee ends in Inc., LLC, etc and you can mark them as a potential 1099 reportable vendor before payment is ever made.
Keep a record! Simply attach the W-9 forms to vendor profiles directly in your bookkeeping software.
When it comes time to file 1099-NEC forms, it's as simple as running a report to list the forms and data needed to file your 1099-NEC forms.
On the flip side, we also recommend YOU HAVE a W-9 form on hand to send to your customers and clients before payments are made TO YOU. You want them to pay AND REPORT the correct vendor name and tax id.
Too often we see 1099-NECs issued to individuals, when in fact they should have been issued to a business. This causes headaches when filing taxes and is a guaranteed auto-flag to the IRS that income wasn't reported correctly.
